REDWOOD MORTGAGE INVESTORS VII (a California Limited Partnership) Index to Form 10-K  December 31, 2006  Part IPage No.Item 1    Business
        4Item 2    Properties
        8Item 3    Legal Proceedings
        8Item 4    Submission of Matters to a Vote of Security Holders (Partners)
        8Part IIItem 5    Market for the Registrants Limited Partnership Units and Related Unitholder Matters
        9Item 6    Selected Financial Data
        9Item 7    Management Discussion and Analysis of Financial Condition and Results of Operations
        11Item 7a  Quantitative and Qualitative Disclosures About Market Risk
        18Item 8    Financial Statements and Supplementary Data
        20Item 9    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
        46Item 9a  Controls and Procedures
        46Item 9b  Other Information
        46Part IIIItem 10  Directors, Executive Officers and Corporate Governance
        47Item 11  Executive Compensation
        48Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
        49Item 13  Certain Relationships and Related Transactions, and Director Independence
        49Item 14  Principal Accountant Fees and Services
        49Part IVItem 15  Exhibits, Financial Statements and Schedules
        50Signatures
        51Certifications
        52    1        UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549  FORM 10-K  (Mark One) x
        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the Year Ended December 31, 2006  OR  [   ]
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from ______________ to ______________  Commission File Number:  000-19992  REDWOOD MORTGAGE INVESTORS VII, a California Limited Partnership (Exact name of registrant as specified in its charter)   California
        94-3094928(State or other jurisdiction of incorporation or organization)
        (I.R.S. Employer Identification)   900 Veterans Blvd., Suite 500, Redwood City, CA
        94063(address of principal executive offices)
        (zip code)   (650) 365-5341 (Registrants telephone number, including area code)   Securities registered pursuant to Section 12 (b) of the Act:
        NONE  Securities registered pursuant to Section 12 (g) of the Act:
        Limited Partnership Units   2       Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended.  Yes
        
        
        No
        XX  Indicate by check mark if the registrant is not required to file pursuant to Section 13 or Section 15(d) of the Securities Act of 1934, as amended.  Yes
        
        
        No
        XX  Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes
        XX
        
        No  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  Large Accelerated Filer
        
        Accelerated Filer
        
        Non-Accelerated Filer
        X  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes
        
        
        No
        XX  As of June 30, 2006, the aggregate value of limited partnership units held by non-affiliates was $9,296,015. This calculation is based on the capital account balance of the limited partners and excludes partnership units held by the general partner.  Documents incorporated by reference:  Portions of the Prospectus dated October 20, 1989, and Supplement #5 dated February 14, 1992, filed on form S-11, are incorporated in Parts II, III, and IV. Exhibits filed as part of Form S-11 Registration Statement #33-30427 are incorporated in part IV.  3       Part I  Item 1  Business  Redwood Mortgage Investors VII, a California Limited Partnership (the Partnership), was organized in 1989 of which Michael R. Burwell and Gymno Corporation, a California corporation, are the general partners. The address of the Partnership and the general partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The Partnership is organized to engage in business as a mortgage lender, for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners. The Partnerships objectives are to make investments, as referred to above, which will: (i) provide the maximum possible cash returns which limited partners may elect to (a) receive as monthly, quarterly or annual cash distributions or (b) have credited to their capital accounts and applied to Partnership
activities; and (ii) preserve and protect the Partnerships capital. The Partnerships general business is more fully described under the section entitled Investment Objectives and Criteria pages 26-31 of the Prospectus, which is incorporated by reference.  Originally, 60,000 Units were offered on a best efforts basis through broker/dealer member firms of the National Association of Security Dealers, Inc. In accordance with the terms of the Prospectus, the general partners increased the number of Units for sale from 60,000 to 120,000 and elected to continue the offering until September 30, 1992. The offering closed on September 30, 1992, and the limited partners contributed capital totaled $11,998,359 of an approved $12,000,000 issue, in Units of $100 each. At that date, all the applicants had been admitted into the Partnership with none left in the applicant status. The final SR report (Report of Sales of Securities and use of proceeds therefrom) was filed on September 21, 1992.  The Partnership began selling Units in October 1989 and began investing in mortgages in December 1989. At December 31, 2006, the Partnership had a balance in its secured loan portfolio totaling $6,218,439 with interest rates thereon ranging from 7.00% to 11.00%.  Currently, loans secured by First Trust Deeds comprise 80.59% of the amount of funds in the secured loan portfolio followed by Second Trust Deeds of 19.41%. Single Family (1-4 unit) homes total 45.84% of the secured loans versus 54.04% in 2005. Commercial loans increased slightly from last year, now comprising 28.54% of the secured portfolio. Loans to apartments totaled 11.05%. Of the total secured loans, 80.65% are located in the nine counties which comprise the San Francisco Bay Area,  15.01% are in counties adjacent to the San Francisco Bay Area and  the balance of  4.34% are primarily in Southern California. Loan size increased the past year, and is now averaging $282,656 per loan, an increase of $45,769. Some of the larger loans invested in by the Partnership are fractionalized between other affiliated partnerships with objectives similar to those of the Partnership to further reduce risk. Average
equity per loan transaction based on appraised values and senior debt at the inception date of the loan, which is our loan plus any senior loans, divided by the propertys appraised value, subtracted from 100%, stood at 38.38%. Generally, the more equity, the more protection for the lender. The Partnerships loan portfolio is in good condition with no property in foreclosure as of December 2006.  Delinquencies are discussed under Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations.   4       Competition and General Economic Conditions  The Partnerships major competitors in providing mortgage loans are banks, savings and loan associations, thrifts, conduit lenders, mortgage brokers, and other entities both larger and smaller than the Partnership. The Partnership is competitive in large part due to the ability of the General Partners to generate all of their loans. Particularly among residential lenders, competition has been strong during the last several years. The volume of residential real estate sales activity declined in 2005 and 2006, leaving fewer transactions for those lenders active in this segment of the lending industry. Subprime lenders, those lenders who make loans to borrowers with low credit scores and higher debt to income ratios, have recently, in response to rising delinquencies and buy back requests on loans due to representation and warranty violations, increased underwriting standards, ceased making loans or in
some circumstances, filed for bankruptcy protection. Through March 2007, three national top-twenty subprime lenders have ceased operations or left the business. The Partnership believes these actions will over time help provide the Partnership with increased lending opportunities, as competition will be reduced among the remaining lenders. It is possible that interest coupon rates may rise, as competition lessens and a clearer risk return equation develops. Underlying these events in the subprime real estate lending marketplace is a national economy which while slowly decelerating is certainly not weak by many indicators.  The United States Gross Domestic Product, the output of goods and services produced by labor and property located in the United States, increased at an estimated annual rate of 3.4% during 2006 as compared to 3.1% during 2005 and 3.9% for 2004. The Bush Administration believes that growth will slow to 2.9%, while the Federal Reserve estimates between 2.5% and 3.0% for 2007. Clearly, the economy has been growing at a reasonable rate for the last three years. Unemployment, a significant indicator of borrowers abilities to make payments, has throughout the United States remained low. The National unemployment rate has continued to decline from 5.5% in 2004 to 4.9% for 2005 and 4.5% as of December 2006. Month to month inflation has been volatile throughout 2006 as oil, a key component to inflation, has ranged widely in short term swings throughout the year. Even with this monthly volatility, inflation has
remained mild with the Consumer Price Index up 2.5% for the year 2006 as compared to increases of 3.4% for 2005, 3.3% for 2004 and 1.9% for 2003. Interest rates have remained steady throughout 2006 with the expectation of little change in the coming year. The Federal Reserve has left the Federal Discount Rate unchanged at 5.25% since June of 2006. In a recent interview, Mr. Ben Bernanke, chairman of the Federal Reserve, said interest rates are at a level that is likely to foster sustainable economic growth and a gradual ebbing of core inflation. Overall the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes. (San Francisco Chronicle, February 15, 2007) Throughout 2006, 30-year mortgage rates have fluctuated between a high of 6.88% in July of 2006 to a low of 6.23% in December of 2006. (Source HSH Associates)   These rates, while higher than in 2005 or 2004, are still
conducive to real estate acquisitions and an active lending marketplace. The residential real estate sales volumes have slowed noticeably during 2005 and 2006 from their peak in 2004.   The number of California home sales in 2006 was 15.3% lower than in 2005 while the median price of a home increased in California to $567,690 according to the California Association of Realtors.  The Partnership is expecting the reduction of lenders in the marketplace, along with the strengthened underwriting standards in the industry, to generate less competition and higher available interest rates on loans made by the Partnership. This combined with a good economy, low unemployment and a slow but steady real estate market of stable values should create an environment in which the Partnership can compete effectively and obtain sufficient loans to meet its lending needs.   5       Secured Loan Portfolio  A summary of the Partnerships secured loan portfolio as of December 31, 2006 is set forth below.  Loans as a Percentage of Appraised ValuesFirst Trust Deed Loans
        
        $
        5,011,682Appraised Value of Properties at Time of Loan
        
        
        8,725,381Total First Trust Deeds as a % of Appraisal
        
        
        57.44
        %First Trust Deed Loans
        
        
        5,011,682Second Trust Deed Loans
        
        
        1,206,7576,218,439Priority positions due other Lenders at Time of LoanFirst Trust Deed Loans due other Lenders
        
        
        2,560,514Total Debt
        
        
        8,778,953Appraised Property Value at Time of Loan
        
        
        14,247,048Total debt as a % of Appraisal based on appraisals and priorliens at date of loan
        
        
        61.62
        %Number of Secured Loans Outstanding
        
        
        22Average Secured Loan
        
        
        282,656Average Secured Loan as a % of Secured Loans Outstanding
        
        
        4.55
        %Largest Secured Loan Outstanding
        
        
        550,000Largest Secured Loan as a % of Secured Loans Outstanding
        
        
        8.84
        %Largest Secured Loan as a % of Partnership Assets
        
        
        5.85
        %  Secured Loans as a Percentage of Total Secured Loans
        
        
        PercentFirst Trust Deed Loans
        
        
        80.59
        %Second Trust Deed Loans
        
        
        19.41
        %Total Trust Deed Loan Percentage
        
        
        100.00
        %  Secured Loans by Type of Property
        
        
        Amount
        
        
        PercentSingle Family (1-4 units)
        
        
        $
        2,850,592
        
        
        45.84
        %Apartments
        
        
        
        687,500
        
        
        11.05
        %Commercial
        
        
        
        1,774,528
        
        
        28.54
        %Land
        
        
        
        905,819
        
        
        14.57
        %Total
        
        
        $
        6,218,439
        
        
        100.00
        %   6       The following is a distribution of secured loans outstanding as of December 31, 2006 by California Counties.  TotalCalifornia County
        
        Secured Loans
        
        
        PercentSan Francisco Bay Area CountiesSan Francisco
        
        $
        1,587,500
        
        
        25.53
        %Santa Clara
        
        
        1,287,500
        
        
        20.70
        %Alameda
        
        
        587,500
        
        
        9.45
        %Napa
        
        
        550,000
        
        
        8.84
        %San Mateo
        
        
        533,500
        
        
        8.58
        %Contra Costa
        
        
        254,392
        
        
        4.09
        %Solano
        
        
        215,000
        
        
        3.46
        %Marin
        
        
        
        
        
        Sonoma
        
        
        
        
        
        5,015,392
        
        
        80.65
        %San Francisco Bay Area Adjacent CountiesMonterey
        
        
        250,000
        
        
        4.02
        %Stanislaus
        
        
        228,536
        
        
        3.68
        %Calaveras
        
        
        189,783
        
        
        3.05
        %San Joaquin
        
        
        136,336
        
        
        2.19
        %Santa Cruz
        
        
        128,392
        
        
        2.07
        %933,047
        
        
        15.01
        %Other California CountiesRiverside
        
        
        135,000
        
        
        2.17
        %San Bernardino
        
        
        135,000
        
        
        2.17
        %270,000
        
        
        4.34
        %Total
        
        $
        6,218,439
        
        
        100.00
        %  Number of Secured Loans in Foreclosure:                                                    0 Scheduled maturity dates of secured loans as of December 31, 2006 are as follows:  Year Ending December 31,
        
        
        
        Amount2007
        
        
        $
        2,225,0002008
        
        
        
        1,127,2832009
        
        
        
        1,462,7372010
        
        
        
        514,0282011
        
        
        
        601,391Thereafter
        
        
        
        288,000Total
        
        
        $
        6,218,439   7       The scheduled maturities for 2007 include one loan totaling approximately $250,000 (4.02% of the Partnerships secured portfolio) which was past maturity at December 31, 2006. Interest payments on this past maturity loan were current. The Partnership allows borrowers to occasionally continue to make the payments on debt past maturity for periods of time. The Partnership, in most instances, receives the benefit of a higher interest rate than would otherwise be available in the currently existing loan marketplace.  It is the Partnerships experience that loans can be refinanced or repaid before and after the maturity date.  Therefore, the table of scheduled maturities is not a forecast of future cash receipts. The loan portfolio had one loan with principal outstanding of $487,500 where interest payment was overdue 90 days or more. The principal outstanding of this loan represents 7.84% of the Partnerships secured portfolio as of December 31, 2006. At December 31, 2006, there was one impaired loan. A loan is considered impaired when events and/or changes in circumstances cause the management to have serious doubts about the collectibility of the contractual payments and interest is no longer accrued.  Item 2  Properties In February, 2005, the Partnership acquired a multi-unit property through foreclosure. This property is located in an upscale neighborhood in San Francisco. This property is jointly owned with three other affiliated partnerships. Upon acquisition the Partnership transferred its interest (principally land and building) to a limited liability company, Larkin Property Company, LLC. No allowance for loss has been set aside as management believes that the fair value of the property exceeds the combined Partnerships investment in the property. The Partnership has undertaken additional improvements to the property. As of December 31, 2006, the Partnerships total investment in this property was $875,408.  The Partnership took back vacant land through a deed in lieu of foreclosure in 2004. The land is located in Stanislaus County, California. It is comprised of three separate lots, which total approximately 14 acres. In September 2006, one of the parcels was sold. This property is owned together with two affiliated partnerships. The Partnerships net investment in the land at December 31, 2006 was $1,470,655. The remaining two parcels are on the market for sale. The general partners believe that the property may not return the Partnerships investment upon sale and have allocated $161,974 reserve against loss. The Partnership also owns (through previous foreclosure) one other property:  an undeveloped parcel of land located in East Palo Alto. The land is owned with two other affiliated partnerships. The Partnerships net investment in the land at December 31, 2006 is $62,720. The Partnerships net investment of $62,720 is less than 1% of Partnership assets.   The property is in contract with an interested buyer and based on the contract agreement, the Partnership should recoup all its investment including some profit.  Item 3  Legal Proceedings In the normal course of business the Partnership may become involved in various types of legal proceedings such as assignments of rents, bankruptcy proceedings, appointments of receivers, unlawful detainers, judicial foreclosures, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes or to protect or recoup its investment from the real property secured by the deeds. As of the date hereof, the Partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.  Item 4  Submission of Matters to a Vote of Security Holders (Partners) No matters have been submitted to a vote of the Partnership.  8       Part II  Item 5  Market for the Registrants Limited Partnership Units and Related Unitholder Matters 120,000 Units at $100 each (minimum 20 Units) were offered through broker-dealer member firms of the National Association of Securities Dealers on a best efforts basis (as indicated in Part I item 1). Investors have the option of withdrawing earnings on a monthly, quarterly, or annual basis or reinvesting and compounding the earnings. Limited partners may withdraw from the Partnership in accordance with the terms of the Partnership Agreement subject to possible early withdrawal penalties. There is no established public trading market. As of December 31, 2006, 470 limited partners had a capital balance of $9,314,021. A description of the Partnership Units, transfer restrictions and withdrawal provisions is more fully described under the section entitled Description of Units and Summary of Limited Partnership Agreement, pages 47 to 50 of the Prospectus, a part of the referenced Registration Statement, which is incorporated herein by reference. During the year 2006, the Partnerships annualized yield on compounding accounts was 5.50% and 5.37% on monthly distributing accounts. During the year 2005, the Partnerships annualized yield on compounding accounts was 5.94% and 5.78% on monthly distributing accounts.  Item 6  Selected Financial Data Redwood Mortgage Investors VII began operations in December 1989.

Financial condition and results of operation for the Partnership as of and for the five years ended December 31, 2006 were:  Balance Sheets  ASSETS  December 31,  2006
        
        
        2005
        
        
        
        
        2004
        
        
        
        
        2003
        
        
        
        
        2002Cash and cash equivalents
        
        $
        584,114
        
        $
        1,627,384
        
        
        
        $
        346,393
        
        
        
        $
        321,114
        
        
        
        $
        1,057,845LoansLoans, secured bydeeds of trust
        
        
        6,218,439
        
        
        5,448,401
        
        
        
        
        7,388,478
        
        
        
        
        8,280,826
        
        
        
        
        6,423,984Loans, unsecured, net
        
        
        714,659
        
        
        161,987
        
        
        
        
        238,484
        
        
        
        
        232,551
        
        
        
        
        216,770Less allowance for loanlosses
        
        
        (454,417
        )
        
        (700,536
        )
        
        
        
        (745,476
        )
        
        
        
        (680,469
        )
        
        
        
        (791,882
        )Interest and otherreceivablesAccrued interestand late fees
        
        
        67,754
        
        
        64,304
        
        
        
        
        190,105
        
        
        
        
        489,995
        
        
        
        
        304,936Advances on loans
        
        
        
        
        
        6
        
        
        
        
        8,188
        
        
        
        
        6,484
        
        
        
        
        17,230Other
        
        
        20,634
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Real estate held for sale, net
        
        
        1,371,401
        
        
        1,870,027
        
        
        
        
        1,782,182
        
        
        
        
        633,053
        
        
        
        
        683,136Investment in limitedliability company
        
        
        875,408
        
        
        882,641
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,212,722$
        9,397,992
        
        $
        9,354,214
        
        
        
        $
        9,208,354
        
        
        
        $
        9,283,554
        
        
        
        $
        9,124,741   9       LIABILITIES AND PARTNERS CAPITAL  December 31,  2006
        
        
        
        
        2005
        
        
        
        
        2004
        
        
        
        
        2003
        
        
        
        
        2002LiabilitiesLine of credit
        
        $
        
        
        
        
        $
        
        
        
        
        $
        
        
        
        
        $
        200,000
        
        
        
        $
        Accounts payable
        
        
        
        
        
        
        
        
        
        
        
        
        4,951
        
        
        
        
        4,102
        
        
        
        
        2,593Deferred interest
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        37,704Payable to affiliate
        
        
        71,998
        
        
        
        
        71,998
        
        
        
        
        74,987
        
        
        
        
        51,288
        
        
        
        
        32,17671,998
        
        
        
        
        71,998
        
        
        
        
        79,938
        
        
        
        
        255,390
        
        
        
        
        72,473Partners capitalGeneral partners
        
        
        11,973
        
        
        
        
        11,973
        
        
        
        
        11,973
        
        
        
        
        11,973
        
        
        
        
        11,978Limited partners subjectto redemption
        
        
        9,314,021
        
        
        
        
        9,270,243
        
        
        
        
        9,116,443
        
        
        
        
        9,016,191
        
        
        
        
        9,040,290Total partners capital
        
        
        9,325,994
        
        
        
        
        9,282,216
        
        
        
        
        9,128,416
        
        
        
        
        9,028,164
        
        
        
        
        9,052,268$
        9,397,992
        
        
        
        $
        9,354,214
        
        
        
        $
        9,208,354
        
        
        
        $
        9,283,554
        
        
        
        $
        9,124,741  STATEMENTS OF INCOME  December 31,  2006
        
        
        
        
        2005
        
        
        
        
        2004
        
        
        
        
        2003
        
        
        
        
        2002Gross revenue
        
        $
        581,284
        
        
        
        $
        691,385
        
        
        
        $
        868,274
        
        
        
        $
        782,280
        
        
        
        $
        1,078,186Expenses
        
        
        75,900
        
        
        
        
        153,830
        
        
        
        
        289,628
        
        
        
        
        189,639
        
        
        
        
        314,704Net income
        
        $
        505,384
        
        
        
        $
        537,555
        
        
        
        $
        578,646
        
        
        
        $
        592,641
        
        
        
        $
        763,482Net income to general partners (1%)
        
        
        5,054
        
        
        
        
        5,376
        
        
        
        
        5,786
        
        
        
        
        5,926
        
        
        
        
        7,635Net income to limited partners (99%)
        
        
        500,330
        
        
        
        
        532,179
        
        
        
        
        572,860
        
        
        
        
        586,715
        
        
        
        
        755,847$
        505,384
        
        
        
        $
        537,555
        
        
        
        $
        578,646
        
        
        
        $
        592,641
        
        
        
        $
        763,482Net income per $1,000 invested bylimited partners for entire period:- where income is compounded
        
        $
        55
        
        
        
        $
        59
        
        
        
        $
        65
        
        
        
        $
        67
        
        
        
        $
        85- where partner receives incomein monthly distributions
        
        $
        54
        
        
        
        $
        58
        
        
        
        $
        63
        
        
        
        $
        65
        
        
        
        $
        82  Annualized yields when income is compounded or distributed monthly for the years 2002 through 2006 are outlined in the table below: Compounded
        
        
        Distributed2002
        
        8.44
        %
        
        8.13
        %2003
        
        6.66
        %
        
        6.47
        %2004
        
        6.49
        %
        
        6.30
        %2005
        
        5.94
        %
        
        5.78
        %2006
        
        5.50
        %
        
        5.37
        %  Average annualized yield from inception through December 31, 2006, when income is compounded and retained, was 7.46%. Average annualized yield from inception through December 31, 2006, when income is distributed monthly was 7.23%.  10       Item 7  Management Discussion and Analysis of Financial Condition and Results of Operations  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Critical Accounting Policies.  In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and income and expenses during the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses (i.e. the amount of allowance established against loans receivable as an estimate of potential loan losses) including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral and (2) the valuation of real estate acquired through foreclosure. At December 31, 2006, we owned four pieces of real property.  Loans and the related accrued interest, late fees and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible.  If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of future cash flows discounted at the loans effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the further collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances.  Real estate held for sale includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the propertys estimated fair value, less estimated costs to sell. The Partnership periodically compares the carrying value of real estate to expected future undiscounted cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to fair value.  Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses and real estate held for sale. Actual results could vary from the aforementioned provisions for losses.  Forward Looking Statements.  Certain statements in this Report on Form 10-K which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Companys expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding future interest rates and economic conditions and their effect on the Partnership and its assets, future sales of properties held by the Partnership and the proceeds from such sales, trends in the California real estate market, estimates as to the allowance for loan losses, estimates of future limited partner withdrawals, 2007 annualized yield estimates, plans to develop certain properties, beliefs regarding the Partnership recovering the full value of its
investment in certain properties, the expectation that borrower foreclosures will not have a material effect on liquidity, and the use of excess cash flow. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected changes in economic conditions and interest rates, the impact of competition and competitive pricing and downturns in the real estate markets in which the Company has made loans. All forward-looking statements and reasons why results may differ included in this Form 10-K are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.   11


Related Parties.  The general partners of the Partnership are Gymno Corporation and Michael R. Burwell. Most Partnership business is conducted through Redwood Mortgage Corp., an affiliate of the general partners, which arranges, services, and maintains the loan portfolio for the benefit of the Partnership. The fees received by the affiliate and the general partners are paid pursuant to the partnership agreement and are determined at the sole discretion of the general partners subject to limitations imposed by the partnership agreement. In the past, the general partners have elected not to take the maximum compensation.  The following is a list of various Partnership activities for which related parties are compensated.  
        Mortgage Brokerage CommissionsFor fees in connection with the review, selection, evaluation, negotiation and extension of loans, an affiliate of the general partners may collect an amount  not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. For the years ended December 31, 2006, 2005 and 2004 loan brokerage commissions paid by borrowers were $97,358, $137,913, and $93,465, respectively.  
        Mortgage Servicing FeesMonthly mortgage servicing fees of up to 1/8 of 1% (1.5% on an annual basis) of the unpaid principal of the Partnerships loans is paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Once a loan is categorized as impaired, mortgage servicing fees are no longer accrued thereon. Additional servicing fees are recorded upon the receipt of any subsequent payments on impaired loans. Mortgage servicing fees of $0, $68,906, and $81,442 were incurred for the years ended December 31, 2006, 2005 and 2004, respectively. Redwood Mortgage Corp. waived mortgage servicing fees of $56,647 for the year 2006.  These servicing fees were charged at 1%, on an annual basis, of the outstanding principal balances. If the maximum mortgage servicing fee of 1.5%, on an annual basis, had been charged to the Partnership, then net income would have been reduced by approximately $84,971, $34,453, and $46,733 for the years ended December 31, 2006, 2005, and 2004, respectively. Reducing net income reduces the annualized yields. An increase or decrease in this fee within the limits set by the partnership agreement directly impacts the yield to the limited partners.  
        Asset Management FeesThe general partners receive monthly fees for managing the Partnerships portfolio and operations up to 1/32 of 1% of thenet asset value(3/8 of 1% on an annual basis). Management fees to the general partners of $8,748, $34,512, and $34,073 were incurred by the Partnership for the years ended December 31, 2006, 2005 and 2004, respectively. For the year ended December 31, 2006, the General Partners waived $26,208 in such fees.  
        Other FeesThe Partnership agreement provides that the general partners or their affiliates may receive other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners.  
        Income and LossesAll income and losses are credited or charged to partners in relation to their respective Partnership interests. The allocation to the general partners (combined) shall not exceed 1%.  
        Operating ExpensesAn affiliate of the Partnership, Redwood Mortgage Corp., is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners.  
        Contributed CapitalThe general partners jointly and severally contributed cash equal to 1/10 of 1% of the total capital raised by the Partnership. The general partners contributed this cash as proceeds from the offerings were received from the limited partners. As of December 31, 2006 and 2005, a general partner, Gymno Corporation, had contributed $11,973 as capital in accordance with Section 4.02(a) of the partnership agreement.  12       Results of Operations For the three years ended December 31, 2006, 2005 and 2004  Changes in the Partnerships operating results for the years ended December 31, 2006 and December 31, 2005 are discussed below: Changes for the years ended December 31,  2006
        
        
        
        
        2005Net income decrease
        
        $
        (32,171
        )
        
        
        $
        (41,091
        )RevenueInterest on loans
        
        
        (130,085
        )
        
        
        
        (145,403
        )Late charges
        
        
        (4,659
        )
        
        
        
        (8,919
        )Other income
        
        
        24,643
        
        
        
        
        (22,567
        )$
        (110,101
        )
        
        
        $
        (176,889
        )ExpensesMortgage servicing fees
        
        
        (68,906
        )
        
        
        
        (12,536
        )Interest expense
        
        
        375
        
        
        
        
        (10,111
        )Clerical costs from Redwood Mortgage Corp.
        
        
        (1,364
        )
        
        
        
        (4,163
        )Asset management fees
        
        
        (25,764
        )
        
        
        
        439Provisions for (recovery of)  losses on loans and real estateheld for sale
        
        
        (643
        )
        
        
        
        (114,752
        )Professional services
        
        
        10,966
        
        
        
        
        877Other
        
        
        6,120
        
        
        
        
        4,448$
        (77,930
        )
        
        
        $
        (135,798
        )Net income decrease
        
        $
        (32,171
        )
        
        
        $
        (41,091
        )  The decrease in interest income of $130,085 (19.33%) for the year ended December 31, 2006 was mainly due to a lower average loan portfolio balance of $5,906,554 in 2006 as compared to the average loan portfolio balance of $6,394,464 in 2005. The average interest rate on loans also declined from 9.25% in 2005 to 9.19% in 2006. In addition, loans totaling $1,343,470 were paid off at the end of 2005. Payoff proceeds were not immediately placed on new loans. Instead, the proceeds were deposited into interest-bearing accounts until such time as suitable loans could be funded. Hence, the Partnership was unable to keep the funds fully employed in loans throughout the year. This resulted in the Partnership maintaining an average balance of $1,116,575 in its bank account at an average rate of 2.32%, compared to an average interest rate of 9.19% on its loan portfolio. The Partnerships average balance in its
money market account in 2005 was $510,300 at an average interest rate of 0.60%, compared to an average interest rate of 9.25% on its loan portfolio. The decline in interest income in 2006 was also due to the Partnership gaining interest income of $42,996 in 2005 on an impaired loan that was repaid in 2005. Prior to 2005, no interest was being accrued against this impaired loan.  The decrease in interest on loans of $145,403 (17.76%) for the year ended December 31, 2005, was primarily due to a lower average loan portfolio balance of $6,394,464 in 2005 compared to an average balance of $7,834,652 in 2004. The decrease is also attributed to an interest rate increase of 1.5% on notes totaling $1,089,820 during 2004. Additionally, the average portfolio interest rate has been declining, from 9.36% in 2004 to 9.25% in 2005 and to 9.19% in 2006. This has the effect of reducing interest income or moderating interest income growth during periods when the portfolio increased and exacerbating interest income declines during periods of portfolio decreases.  The decrease in late charge revenue of $4,659 (42.73%) and $8,919 (45.00%) for the years ended December 31, 2006 and December 31, 2005, respectively, was primarily due to improved loan collections and reduced delinquencies.   13       The increase in other income of $24,643 (334.91%) for the year ended December 31, 2006 was due largely to interest earned on bank deposits of $25,930 in 2006 compared to $3,068 in 2005. The increase of $22,862 (745.66%) in 2006 was due to a larger average deposit of $1,116,575 at an average interest rate of 2.32% compared to an average deposit of $510,300 in 2005 at an average interest rate of .60%. In addition, the Partnership earned $4,744 in early withdrawal penalties in 2006 as compared to $2,458 in 2005, offset by a decrease in miscellaneous income of $505 in 2006. The decrease of $22,567 (75.41%) in other income in 2005 compared to 2004 was due largely to the sale of real estate owned in 2004 which had been generating fee income. Upon sale of this property in 2004, this income ceased. The fee income in 2004 totaled $23,143. The decrease in other income was also due to a decline in early withdrawal
penalties of $2,014 in 2005 compared to $2,741 in 2004, offsetting an increase in miscellaneous income of $273 in 2005.  The decrease in mortgage servicing fees of $68,906 (100%) for the year ended December 31, 2006 was solely due to management waiving all of the mortgage servicing fees totaling $56,647. The decrease was also attributed to the Partnership collecting interest and hence mortgage servicing fees of $8,870, from an impaired loan which paid off in 2005. The decrease of $12,536 (15.39%) for the year ended December 31, 2005 is largely attributable to the Partnerships fluctuating average portfolio balances of $6,394,464 in 2005 versus $7,834,652 in 2004.  The increase in interest expense of $375 (54.11%) for the year ended December 31, 2006 represents amortization of a loan fee of $1,068 in 2006 versus an interest expense of $693 for use of the line of credit in 2005. The Partnership did not utilize the line of credit in 2006 hence no interest expense was incurred. In 2005, the Partnership made very minimal use of the line of credit with a weighted average borrowing of $12,500 in 2005 at a weighted average interest rate of 5.55% compared to a weighted average borrowing of $382,265 for the year ended December 31, 2004, at a weighted average interest rate of 4.93%. Non-use of the line of credit borrowing in 2006 was because of the decline in average loan portfolio of $5,906,554 as compared to an average portfolio balance of $6,394,464 in 2005. This lower average balance in 2006 was due to more loan pay-offs in late 2005 versus the Partnerships ability to
fund additional loans in 2006. These loan pay-off proceeds were mainly used to fund new loans without resorting to the line of credit facility.  The decrease in asset management fees of $25,764 (74.65%) for the year ended December 31, 2006, and an increase of $439 (1.29%) for the year ended December 31, 2005 was due to the general partners waiving fees of $26,208 during the first nine months of 2006. During 2005, the Partnership paid its full asset management fee based on the limited partners capital balance at the end of each month which averaged $9,203,112 in 2005, compared to an average balance of $9,086,071 in 2004 which led to the increase in fees in 2005.  The decrease in clerical costs of $1,364 (9.98%) and $4,163 (23.35%) for the years ended December 31, 2006 and 2005, respectively, was primarily due to lower clerical costs servicing the Partnership.  Loan loss recoveries/provisions were ($49,102), ($49,745), and $65,007 for the years ended December 31, 2006, 2005, and 2004, respectively. The increase in provision for 2004 was precautionary due to the foreclosure that existed at December 31, 2004. A negative provision of $49,102 and $49,745 in 2006 and 2005 was due to managements assessment of the appropriate loan loss allowance at such dates due to lower existing delinquencies and lower loan balances. The general partners believe that the allowance for loan losses of $454,417 at December 31, 2006 was adequate to offset potential losses on loans.  The increase in professional fees of $10,966 (21.84%) and $877 (1.78%) for the years ended December 31, 2006 and 2005, respectively, was primarily due to general accounting cost increases in 2006 and 2005 in relation to its legal services, audit and tax return processing.  During 2007, we anticipate the cost of professional services to increase due to the Partnership initiating additional compliance work in accordance with the Sarbanes-Oxley Act.  The increase in other expenses of $6,120 (17.20%) and $4,448 (14.29%) for the years ended December 31, 2006 and 2005, respectively, was primarily due to the upkeep costs of the real estate held for sale properties. The Partnership expensed $33,708 and $26,242 for the years ended December 31, 2006 and 2005, respectively, on the properties.   14       Allowance for Losses.  The general partners regularly review the loan portfolio, examining the status of delinquencies, the underlying collateral securing these properties, the real estate held for sale expenses and sales activities, borrowers payment records, etc. Data on the local real estate market and on the national and local economy are studied. Based upon this information and other data, loss reserves are increased or decreased. The Partnership is not a credit based lender and hence while it reviews the credit history and income of borrowers, and if applicable, the income from income producing properties, the general partners expect that we will on occasion take back real estate security. During 2005 and 2006, the California economy has remained vibrant and the California real estate market has slowed in terms of the number of residential properties sold, but the median price of a single family home ended 2006 at a
slightly higher level than 2005. Borrower foreclosures are a normal aspect of Partnership operations and the general partners anticipate that they will not have a material effect on liquidity. As of December 31, 2006, the Partnership had one loan with outstanding principal totaling $250,000 past maturity. Interest payments on this past maturity loan were not delinquent over 90 days. In addition, the loan portfolio had one loan with principal outstanding of $487,500 where interest payments were overdue 90 days. There were no loans against which the Partnership had notice of default filed at December 31, 2006. At December 31, 2006, total 90 days past maturity loans, and loans with interest payments 90 days overdue, totaled $737,500 representing 2 loans which were 11.86% of the secured loan portfolio. The Partnership enters into workout agreements with borrowers who are past maturity or delinquent in their regular payments. The Partnership had no workout agreements as of December 31,
2006. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment, allows the borrower to make current monthly payments while deferring for periods of time, past due payments, or allows time to pay the loan in full. These workout agreements and foreclosures generally exist within our loan portfolio to greater or lesser degrees, depending primarily on the health of the economy. The number of foreclosures and workout agreements will rise during difficult times and conversely fall during good economic times. These workouts have been considered when management arrived at appropriate loan loss reserves and based on our experience, are reflective of our loan marketplace segment. Because of the number of variables involved, the magnitude of the possible swings and the general partners inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. Management
provided for ($49,102), ($49,745), and $65,007 as provisions (recoveries) for losses on loans and real estate for the years ended December 31, 2006, 2005 and 2004, respectively. The general partners believe that current reserves for losses are adequate to handle potential losses. If conditions change, the Partnership may increase or decrease its provisions for loan losses and real estate held for sale.  The Partnership may restructure loans. This is done either through the modification of an existing loan or by rewriting a whole new loan. A modification could involve, among other conditions, an extension in maturity date, a reduction in repayment amount, a change in interest rate, or granting of additional loan funds.  The Partnership did not restructure any loans in 2006 or 2005.  Borrower Liquidity and Capital Resources.  The Partnership relies upon loan payoffs, borrowers mortgage payments, and, to a lesser degree, its line of credit for the source of funds for loans. Over the past several years, mortgage interest rates have decreased somewhat from those available at the inception of the Partnership. If interest rates were to increase substantially, the yield of the Partnerships loans may provide lower yields than other comparable debt-related investments. Additionally, since the Partnership has made primarily fixed rate loans, if interest rates were to rise, the likely result would be a slower prepayment rate for the Partnership. This could cause a lower degree of liquidity as well as a slowdown in the ability of the Partnership to invest in loans at the then current interest rates. Conversely, in the event interest rates were to decline, the Partnership could see significant borrower prepayments, which, if the
Partnership can only obtain the then existing lower rates of interest, may cause a dilution of the Partnerships yield on loans, thereby lowering the Partnerships overall yield to the limited partners. The Partnership to a lesser degree relies upon its line of credit to fund loans. Generally, the Partnerships loans are fixed rate, whereas the credit line is a variable rate loan. In the event of a significant increase in overall interest rates, the credit line rate of interest could increase to a rate above the average portfolio rate of interest. Should such an event occur, the general partners would desire to pay off the line of credit. Retirement of the line of credit would reduce the overall liquidity of the Partnership. Cash is constantly being generated from borrower payments of interest, principal and loan payoffs. Currently, cash flow greatly exceeds Partnership expenses and earnings distribution requirements. Excess cash flow is invested in new loan
opportunities, when available, and is used to reduce the Partnership credit line or for other Partnership business.   15       At the time of subscription to the Partnership, limited partners made a decision to either take distributions of earnings monthly, quarterly or annually or to compound earnings in their capital account. For the years ended December 31, 2006, 2005 and 2004, the Partnership made following allocations of earnings both to the limited partners who elected to compound their earnings, and those that chose to distribute:  2006
        
        
        
        2005
        
        
        
        2004Compounding
        
        $
        312,898
        
        
        $
        348,748
        
        
        $
        374,066Distributing
        
        $
        187,432
        
        
        $
        183,432
        
        
        $
        198,794  As of December 31, 2006, 2005 and 2004, limited partners electing to withdraw earnings represented 38%, 36% and 35% of the limited partners capital.  The Partnership agreement also allows the limited partners to withdraw their capital account subject to certain limitations. For the years ended December 31, 2006, 2005 and 2004, $54,733, $30,727, and $34,267, respectively, were liquidated subject to the 10% penalty for early withdrawal. These withdrawals are within the normally anticipated range that the general partners would expect in their experience in this and other partnerships. The general partners expect that a small percentage of limited partners will elect to liquidate their capital accounts over one year with a 10% early withdrawal penalty. In originally conceiving the Partnership, the general partners wanted to provide limited partners needing their capital returned a degree of liquidity. Generally, limited partners electing to withdraw over one year need to liquidate their investment to raise cash. The trend the Partnership is experiencing in
withdrawals by limited partners electing a one year liquidation program represents a small percentage of limited partner capital as of December 31, 2006, 2005, and 2004, respectively.  Additionally for the years ended December 31, 2006, 2005, and 2004, $214,387, $164,220, and $239,547, respectively, were liquidated by limited partners who have elected a liquidation program over a period of five years or longer. This ability to withdraw after five years by limited partners has the effect of providing limited partner liquidity. The general partners expect a portion of the limited partners to take advantage of this provision. This has the anticipated effect of the Partnership growing, primarily through reinvestment of earnings in years one through five. The general partners expect to see increasing numbers of limited partner withdrawals in years five through eleven, after which time the bulk of those limited partners who have sought withdrawal have been liquidated. After year eleven, liquidation generally subsides.  Earnings and capital liquidations, including early withdrawals, during the three years ended December 31, 2006 were:  Years ended December 31,  Earnings
        
        CapitalLiquidation
        
        Liquidation
        
        Total2006
        $     187,432
        
        *$    269,120
        
        $     456,5522005
        $     183,432
        
        *$    194,947
        
        $     378,3792004
        $     198,794
        
        *$    273,814
        
        $     472,608  * These are gross amounts, which are not net of early withdrawal penalties.   16       In some cases in order to satisfy Broker Dealers and other reporting requirements, the general partners have valued the limited partners interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the Broker Dealers and other reporting entities. In those cases, the Partnership will report to Broker Dealers, Trust Companies and others a reporting number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partners capital account value divided by $1.00. Each investors capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting
Units are solely for Broker Dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners right or interest in cash flow or any other economic benefit in the Partnership. Each investors capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investors capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any NASD member client account statement in providing a per Unit estimated value of the clients investment in the Partnership in accordance with NASD Rule 2340.  While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnerships Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties.  Current Economic Conditions.  The Partnership makes loans secured by California real estate. The health of the California real estate market is of primary concern to the Partnership, as we rely upon the equity securing our loans for repayment. The majority of our loans are secured by property located in Northern California, dominated by loans made in the nine county San Francisco Bay Area. As of December 31, 2006, approximately 80.65% of the loans held by the Partnership were located in the nine counties which comprise the San Francisco Bay Area region.  The California economy has performed well in 2006 and the outlook for 2007 is much the same. The California unemployment rate for December 2006 was 4.8% compared to 5.1% in 2005. The San Francisco unemployment rate was lower than the state at 4.0% for December 2006. According to the Association of Bay Area Governments in its annual forecast, the San Francisco Bay Area economy is likely to grow at a slow to moderate pace in 2007and 2008. The region will add approximately 47,000 payroll jobs in 2007 and the same number in 2008. Household income should rise about one percent above inflation each year.  The appreciation rate, beneficial to residential real estate in the nine county San Francisco Bay Area for the past five years, moved the median home price up 72% to reach a median of $628,000 in 2006 versus $365,000 in 2001, according to DataQuick Information Systems. The appreciation rate between 2005 and 2006 was .5% in the nine counties from December 2005 to December 2006. The median price of a home in California rose 3.7% during 2006 to $567,690 as of December 2006. (California Association of Realtors)  The number of sales transactions has declined significantly during 2006. The number of homes sold in 2006 was 15.3% less than in 2005. The lower number of sales clearly illustrates the slower market which exists from the over-heated markets of 2003, 2004 and some of 2005. Yet values, as reflected in the median home sales price, continue to rise, albeit a much slower pace.  The slow or limited
residential appreciation indicates stable values of residential real estate and a return to a more traditional real estate marketplace which is comforting to the Partnership. Loan-to-value for originated loans can be relied upon and appraisers should have adequate and reliable data upon which to make value opinions.  Commercial properties continued their strong performances in the San Francisco Bay Area. By way of example, the San Francisco market saw vacancies decline to 8.5%, a five year low. Average rents increased to $36.44 per square foot with nearly 2.7 million square feet of positive space absorption in 2006. All other regions of the San Francisco Bay Area exhibited similar improved results from 2005.  The San Francisco office investment market ended a good year with over $3.6 billion in office transactions closed and over 9.69 million square feet of space changing hands.   17       For Partnership loans outstanding at December 31, 2006, the Partnership had an average loan-to-value of 61.62% computed based on appraised values and senior liens as of the date the loan was made. This percentage does not account for any increases or decreases in property values since the date the loan was made, nor does it include any reductions in principal on senior indebtedness through amortization of payments after the loan was made. Management believes that low loan-to-value ratios will assist the Partnership in weathering loan delinquencies and foreclosures should they occur.  Contractual Obligations Table.None  Item 7a  Quantitative and Qualitative Disclosures About Market Risk  The following table contains information about the cash held in money market accounts,  loans held in the Partnerships portfolio and on our line of credit as of December 31, 2006. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2007 through 2011 and separately aggregates the information for all maturities arising after 2011. The carrying values of these assets and liabilities approximate their fair market values as of December 31, 2006:  2007
        2008
        2009
        2010
        2011
        Thereafter
        TotalInterest earning assets:Money market accounts
        $     82,695
        
        
        
        
        
        $      82,695Average interest rate
        2.73%
        
        
        
        
        
        2.73%Loans secured by deedsof trust
        2,225,000
        1,127,283
        1,462,737
        514,028
        601,391
        288,000
        6,218,439Average interest rate
        9.41%
        9.75%
        8.52%
        9.38%
        9.11%
        9.65%
        9.24%Unsecured loans
        
        
        
        571,494
        
        143,165
        714,659Average interest rate
        
        
        
        0%
        
        0%
        0%Interest bearing liabilities:Line of credit
        -
        
        
        
        
        
        -Average interest rate
        8.50%
        
        
        
        
        
        8.50%  Unsecured loans include three loans that have no stated rate of interest, for which the Partnership is imputing interest.  One other loan, which has become unsecured, with a coupon rate of 9.25% has been placed by the Partnership on nonaccrual status.  As such, the average interest rate for unsecured loans has been reflected at 0%.  Market Risk.  The Partnerships line of credit bears interest at a variable rate, tied to the prime rate. As a result, the Partnerships primary market risk exposure with respect to its obligations is to changes in interest rates, which will affect the interest cost of outstanding amounts on the line of credit. The Partnership may also suffer market risk tied to general trends affecting real estate values that may impact the Partnerships security for its loans.  The Partnerships primary market risk in terms of its profitability is the exposure to fluctuations in earnings resulting from fluctuations in general interest rates. The majority of the Partnerships mortgage loans earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnerships investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. If interest rates increase, the interest rates the Partnership obtains from reinvested funds will generally increase, but the value of the Partnerships existing loans at fixed rates will generally tend to decrease. The risk is mitigated by the fact that the Partnership does not intend to sell its loan portfolio, rather such loans are held until they are paid off. If interest rates decrease, the amounts
becoming available to the Partnership for investment due to repayment of Partnership loans may be reinvested at lower rates than the Partnership had been able to obtain in prior investments, or than the rates on the repaid loans. In addition, interest rate decreases may encourage borrowers to refinance their loans with the Partnership at a time where the Partnership is unable to reinvest in loans of comparable value.   18       The Partnership does not hedge or otherwise seek to manage interest rate risk. The Partnership does not enter into risk sensitive instruments for trading purposes.  PORTFOLIO REVIEW For the years ended December 31, 2006, 2005 and 2004.  Loan Portfolio  The Partnerships loan portfolio consists primarily of short-term (one to five years), fixed rate loans secured by real estate. As of December 31, 2006, 2005 and 2004, the Partnerships loans secured by real property collateral in the nine San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Marin, Alameda, Sonoma, Napa, Solano, and Contra Costa) represented $5,015,392 (80.65%), $4,090,089 (75.07%), and $4,902,146 (66.34%), respectively, of the outstanding secured loan portfolio. The majority of the remaining portfolio represented loans secured by real estate located primarily in Northern California.  The following table sets forth the distribution of loans held by the Partnership by property type for the years ended December 31, 2006, 2005 and 2004:  2006
        
        2005
        
        2004  Single Family(1-4 units)
        $2,850,592
        
        45.84%
        
        $ 2,944,330
        
        54.04%
        
        $4,493,519
        
        60.82%Apartments(over 4 units)
        687,500
        
        11.05%
        
        570,000
        
        10.46%
        
        971,864
        
        13.15%Commercial
        1,774,528
        
        28.54%
        
        1,487,019
        
        27.29%
        
        1,923,095
        
        26.03%Land
        905,819
        
        14.57%
        
        447,052
        
        8.21%
        
        -
        
        -Total
        $6,218,439
        
        100.00%
        
        $ 5,448,401
        
        100.00%
        
        $7,388,478
        
        100.00%  As of December 31, 2006, the Partnership held 22 loans secured by deeds of trust. The following table sets forth the priorities, asset concentrations and maturities of the secured loans held by the Partnership as of December 31, 2006.  PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS As of December31, 2006  # of Loans
        
        
        
        Amount
        
        
        
        Percent1st Mortgages
        
        17
        
        
        
        $       5,011,682
        
        
        
        80.59%2nd Mortgages
        
        5
        
        
        
        1,206,757
        
        
        
        19.41%Total
        
        22
        
        
        
        $       6,218,439
        
        
        
        100.00%Maturing in 2007
        
        6
        
        
        
        $       2,225,000
        
        
        
        35.78%Maturing in 2008
        
        5
        
        
        
        1,127,283
        
        
        
        18.13%Maturing in 2009
        
        5
        
        
        
        1,462,737
        
        
        
        23.52%Maturing after 12/31/09
        
        6
        
        
        
        1,403,419
        
        
        
        22.57%Total
        
        22
        
        
        
        $       6,218,439
        
        
        
        100.00%Average Secured Loan
        
        
        
        
        
        $          282,656
        
        
        
        4.55%Largest Secured Loan
        
        
        
        
        
        550,000
        
        
        
        8.84%Smallest Secured Loan
        
        
        
        
        
        101,392
        
        
        
        1.63%Average Loan-to-Value based upon appraisalsand prior liens at time of loan
        
        
        
        
        
        
        
        
        
        61.62%     19        At December 31, 2006 and 2005, the Partnership had unsecured loans totaling $714,659 and $161,987, respectively.  Three of the loans are noninterest bearing and are due in monthly installments of $2,415 through various maturities. These monthly payments escalate at various times through the loan maturity date.  Interest has been imputed on these loans at interest rates for comparable loans made during the same periods.  During 2006, a loan in the amount of $571,494 became unsecured.  The Partnership has placed the loan on nonaccrual status.  The Partnership is pursuing collection efforts against the borrower for the entire amount of outstanding principal and past due interest.  The general partners have established an allowance for loan losses for its unsecured loans as a protection against amounts that may ultimately prove uncollectible.  ASSET QUALITY  A consequence of lending activities is that occasionally losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers. Many of these factors are beyond the control of the general partners. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio, especially in light of the current economic environment.  The conclusion that a loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to requirements and regulations that, among other things, require them to perform ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and to obtain and maintain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted certain of these practices.  Instead, the general partners, in connection with the periodic closing of the accounting records of the Partnership and the preparation of the financial statements, determine whether the allowance for loan losses is adequate to cover potential loan losses of the Partnership. As of December 31, 2006, the general partners have determined that the allowance for loan losses and real estate held for sale of $616,391 (6.61% of net assets) is adequate in amount. Because of the number of variables involved, the magnitude of the swings possible and the general partners inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. As of December 31, 2006, two secured loans were delinquent 90 days past maturity or in payment of interest with outstanding principal of $737,500.  The Partnership may make loans requiring periodic disbursements of funds. As of December 31, 2006, there were no such loans. These loans include ground up construction of buildings and loans for rehabilitation of existing structures. Interest on such loans is computed at simple interest method and only on the amounts disbursed on a daily basis.  Item 8  Financial Statements and Supplementary Data  A  Financial Statements  The following financial statements of Redwood Mortgage Investors VII are included in Item 8:  
        Report of Independent Registered Public Accounting Firm
        Balance Sheets - December 31, 2006, and December 31, 2005
        Statements of Income for the years ended December 31, 2006, 2005 and 2004
        Statements of Changes in Partners Capital for the years ended December 31, 2006, 2005 and 2004
        Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
        Notes to Financial Statements  B  Financial Statement Schedules  The following financial statement schedules of Redwood Mortgage Inventors VII are included in Item 8.  
        Schedule II  - Valuation and Qualifying Accounts
        Schedule IV - Mortgage Loans on Real Estate  All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.  20            REDWOOD MORTGAGE INVESTORS VII (A CALIFORNIA LIMITED PARTNERSHIP) FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION AS OF DECEMBER 31, 2006 AND 2005 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2006         21          TABLE OF CONTENTS  Page No.Report of Independent Registered Public Accounting Firm
        
        23Balance Sheets
        
        24Statements of Income
        
        25Statements of Changes in Partners Capital
        
        26Statements of Cash Flows
        
        27Notes to Financial Statements
        
        28Supplemental SchedulesSchedule II -  Valuation and Qualifying Accounts
        
        43Schedule IV - Mortgage Loans on Real Estate
        
        44Rule 12-29 Loans on Real Estate   22


ARMANINO McKENNA LLP CERTIFIED PUBLIC ACCOUNTANTS 12667 Alcosta Blvd., Suite 500 San Ramon, CA 94583 (925) 790-2600  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Partners Redwood Mortgage Investors VII Redwood City, California  We have audited the accompanying balance sheets of Redwood Mortgage Investors VII (a California limited partnership) as of December 31, 2006 and 2005 and the related statements of income, changes in partners capital and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of Redwood Mortgage Investors VIIs management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Redwood Mortgage Investors VII is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Redwood Mortgage Investors VIIs internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Redwood Mortgage Investors VII as of December 31, 2006 and 2005 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.  Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules II and IV are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.  ARMANINO McKENNA  LLP San Ramon, California March 26, 2007  23       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Balance Sheets December 31, 2006 and 2005   ASSETS  2006
        
        
        
        
        2005Cash and cash equivalents
        
        $
        584,114
        
        
        
        $
        1,627,384LoansLoans secured by deeds of trust
        
        
        6,218,439
        
        
        
        
        5,448,401Loans, unsecured, net of discount of $65,802 and$71,971 in 2006 and 2005, respectively
        
        
        714,659
        
        
        
        
        161,987Allowance for loan losses
        
        
        (454,417
        )
        
        
        
        (700,536
        )Net loans
        
        
        6,478,681
        
        
        
        
        4,909,852Interest and other receivablesRelated party receivables
        
        
        20,634
        
        
        
        
        Accrued interest and late fees
        
        
        67,754
        
        
        
        
        64,304Advances on loans
        
        
        
        
        
        
        
        6Total interest and other receivables
        
        
        88,388
        
        
        
        
        64,310Investment in limited liability company
        
        
        875,408
        
        
        
        
        882,641Real estate held for sale, net
        
        
        1,371,401
        
        
        
        
        1,870,027Total assets
        
        $
        9,397,992
        
        
        
        $
        9,354,214   LIABILITIES AND PARTNERS CAPITAL  LiabilitiesPayable to affiliate
        
        $
        71,998
        
        
        
        $
        71,998Total liabilities
        
        
        71,998
        
        
        
        
        71,998Partners capitalLimited partners capital, subject to redemption
        
        
        9,314,021
        
        
        
        
        9,270,243General partners capital
        
        
        11,973
        
        
        
        
        11,973Total partners capital
        
        
        9,325,994
        
        
        
        
        9,282,216Total liabilities and partners capital
        
        $
        9,397,992
        
        
        
        $
        9,354,214   The accompanying notes are an integral part of these financial statements.   24       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Statements of Income For the Years Ended December 31, 2006, 2005 and 2004   2006
        
        
        
        
        2005
        
        
        
        
        2004RevenuesInterest on loans
        
        $
        543,039
        
        
        
        $
        673,124
        
        
        
        $
        818,527Late fees
        
        
        6,244
        
        
        
        
        10,903
        
        
        
        
        19,822Other
        
        
        32,001
        
        
        
        
        7,358
        
        
        
        
        29,925581,284
        
        
        
        
        691,385
        
        
        
        
        868,274ExpensesMortgage servicing fees
        
        
        
        
        
        
        
        68,906
        
        
        
        
        81,442Interest expense
        
        
        1,068
        
        
        
        
        693
        
        
        
        
        10,804Clerical costs from Redwood Mortgage Corp.
        
        
        12,299
        
        
        
        
        13,663
        
        
        
        
        17,826Asset management fees
        
        
        8,748
        
        
        
        
        34,512
        
        
        
        
        34,073Provisions for (recovery of) losses on loansand real estate held for sale
        
        
        (49,102
        )
        
        
        
        (49,745
        )
        
        
        
        65,007Professional services
        
        
        61,186
        
        
        
        
        50,220
        
        
        
        
        49,343Other
        
        
        41,701
        
        
        
        
        35,581
        
        
        
        
        31,13375,900
        
        
        
        
        153,830
        
        
        
        
        289,628Net income
        
        $
        505,384
        
        
        
        $
        537,555
        
        
        
        $
        578,646Net incomeGeneral partners (1%)
        
        $
        5,054
        
        
        
        $
        5,376
        
        
        
        $
        5,786Limited partners (99%)
        
        
        500,330
        
        
        
        
        532,179
        
        
        
        
        572,860$
        505,384
        
        
        
        $
        537,555
        
        
        
        $
        578,646Net income per $1,000 invested by limited partners for entire periodWhere income is reinvested
        
        $
        55
        
        
        
        $
        59
        
        
        
        $
        65Where partner receives income in monthly distributions
        
        $
        54
        
        
        
        $
        58
        
        
        
        $
        63   The accompanying notes are an integral part of these financial statements.  25       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Statements of Changes in Partners Capital For the Years Ended December 31, 2006, 2005 and 2004   Limited
        
        
        
        
        General
        
        
        
        
        TotalPartners
        
        
        
        
        Partners
        
        
        
        
        PartnersCapital
        
        
        
        
        Capital
        
        
        
        
        CapitalBalances at December 31, 2003
        
        $
        9,016,191
        
        
        
        $
        11,973
        
        
        
        $
        9,028,164Net income
        
        
        572,860
        
        
        
        
        5,786
        
        
        
        
        578,646Early withdrawal penalties
        
        
        (2,741
        )
        
        
        
        
        
        
        
        
        (2,741
        )Partners withdrawals
        
        
        (469,867
        )
        
        
        
        (5,786
        )
        
        
        
        (475,653
        )Balances at December 31, 2004
        
        
        9,116,443
        
        
        
        
        11,973
        
        
        
        
        9,128,416Net income
        
        
        532,179
        
        
        
        
        5,376
        
        
        
        
        537,555Early withdrawal penalties
        
        
        2,014
        )
        
        
        
        
        
        
        
        
        (2,014
        )Partners withdrawals
        
        
        (376,365
        )
        
        
        
        (5,376
        )
        
        
        
        (381,741
        )Balances at December 31, 2005
        
        
        9,270,243
        
        
        
        
        11,973
        
        
        
        
        9,282,216Net income
        
        
        500,330
        
        
        
        
        5,054
        
        
        
        
        505,384Early withdrawal penalties
        
        
        (4,744
        )
        
        
        
        
        
        
        
        
        (4,744
        )Partners withdrawals
        
        
        (451,808
        )
        
        
        
        (5,054
        )
        
        
        
        (456,862
        )Balances at December 31, 2006
        
        $
        9,314,021
        
        
        
        $
        11,973
        
        
        
        $
        9,325,994   The accompanying notes are an integral part of these financial statements.  26       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Statements of Cash Flows For the Years Ended December 31, 2006, 2005 and 2004  2006
        
        
        2005
        
        
        
        2004Cash flows from operating activitiesNet income
        
        $
        505,384
        
        $
        537,555
        
        
        $
        578,646Adjustments to reconcile net income tonet cash provided by operating activitiesProvisions for (recovery of) losseson loans and real estate
        
        
        (49,102
        )
        
        (49,745
        )
        
        
        65,007Early withdrawal penalty credited to income
        
        
        (4,744
        )
        
        (2,014
        )
        
        
        (2,741
        )Amortization of discount on unsecured loans
        
        
        (6,169
        )
        
        (35,462
        )
        
        
        (21,487
        )Change in operating assets and liabilitiesAccrued interest and late fees
        
        
        (38,195
        )
        
        76,379
        
        
        
        (252,153
        )Advances on loans
        
        
        (2,379
        )
        
        2,654
        
        
        
        (5,987
        )Related party receivable
        
        
        (20,634
        )
        
        
        
        
        
        Payable to affiliate
        
        
        
        
        
        (4,951
        )
        
        
        849Deferred interest
        
        
        
        
        
        (2,989
        )
        
        
        23,699Net cash provided by operating activities
        
        
        384,161
        
        
        521,427
        
        
        
        385,833Cash flows from investing activitiesPrincipal collected on loans
        
        
        3,380,178
        
        
        5,023,486
        
        
        
        3,517,558Loans originated
        
        
        (4,459,946
        )
        
        (3,859,637
        )
        
        
        (3,821,719
        )Loans unsecured
        
        
        22,186
        
        
        83,391
        
        
        
        15,554Payments for real estate
        
        
        
        
        
        (54,472
        )
        
        
        (17
        )Proceeds from disposition of real estate
        
        
        79,780
        
        
        
        
        
        
        603,723Payments on investmentin limited liability company
        
        
        (27,083
        )
        
        (51,463
        )
        
        
        Proceeds from investmentin limited liability company
        
        
        34,316
        
        
        
        
        
        
        Net cash provided by (used in) investing activities
        
        
        (970,569
        )
        
        1,141,305
        
        
        
        315,099Cash flows from financing activitiesBorrowings (repayments) on line of credit, net
        
        
        
        
        
        
        
        
        
        (200,000
        )Partners withdrawals
        
        
        (456,862
        )
        
        (381,741
        )
        
        
        (475,653
        )Net cash used in financing activities
        
        
        (456,862
        )
        
        (381,741
        )
        
        
        (675,653
        )Net increase (decrease)in cash and cash equivalents
        
        
        (1,043,270
        )
        
        1,280,991
        
        
        
        25,279Cash and cash equivalents at beginning of year
        
        
        1,627,384
        
        
        346,393
        
        
        
        321,114Cash and cash equivalents at end of year
        
        $
        584,114
        
        $
        1,627,384
        
        
        $
        346,393Supplemental disclosures of cash flow informationCash payments for interest
        
        $
        1,068
        
        $
        693
        
        
        $
        10,804  The accompanying notes are an integral part of these financial statements.   27       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  1.        Organization and General  Redwood Mortgage Investors VII, (the Partnership) is a California Limited Partnership organized on June 30, 1989. The general partners are Michael R. Burwell, an individual, and Gymno Corporation, a California corporation whose stockholders are Michael R. Burwell and two trusts both of whose trustee is Michael R. Burwell. The Partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are being arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners.  Term of the Partnership  The Partnership is scheduled to terminate on December 31, 2029, unless sooner terminated as provided in the Partnership Agreement.  2.        Summary of Significant Accounting Policies  Management estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans and the valuation of real estate held for sale. Actual results could differ significantly from these estimates.  Loans, secured by deeds of trust  Loans generally are stated at their outstanding unpaid principal balance with interest thereon being accrued as earned.  If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement, and the shortfall in the amounts due are not insignificant, the carrying amount of the loan is reduced to the present value of future cash flows discounted at the loans effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral.  28       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  2.        Summary of Significant Accounting Policies (continued)  Loans, secured by deeds of trust (continued)  If events and or changes in circumstances cause management to have serious doubts about the further collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances. At December 31, 2006, there was one unsecured loan totaling $571,494 that was considered impaired by the Partnership.  At December 31, 2005, there were no loans categorized as impaired by the Partnership. The average recorded investment in impaired loans was $285,747 and $48,355 for December 31, 2006 and 2005, respectively.  At December 31, 2006 and 2005, the Partnership had two and three secured loans 90 days past maturity or past due 90 days or more totaling $737,500 and $362,867, respectively. In addition, accrued interest and advances on these secured loans totaled $26,250 and $8,226 at December 31, 2006 and 2005, respectively. The Partnership does not consider any of these secured loans to be impaired because there is sufficient collateral to cover the amount outstanding to the Partnership and is still accruing interest on these loans. At December 31, 2006 and 2005, as presented in Note 11, the average loan to appraised value of security based upon appraised values and prior indebtedness at the time the loans were consummated was 61.62% and 67.18%, respectively. When loans are considered impaired, the allowance is updated to reflect the change in the valuation of collateral
security. However, a low loan to value ratio has the tendency to minimize reductions for impairment.  Allowance for loan losses  Loans and the related accrued interest, late fees and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable. The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible.  29       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  2.        Summary of Significant Accounting Policies (continued)  Allowance for loan losses (continued)  The composition of the allowance for loan losses was as follows:  December 31,
        
        December 31,2006
        
        2005Amount
        
        Percent of loans in each category to total loans
        
        Amount
        
        Percent of loans in each category to total loansBalance at End of YearApplicable to:DomesticReal estate  mortgageSingle family (1-4 units)
        $     68,548
        
        45.84%
        
        $     286,543
        
        54.04%Apartments
        10,156
        
        11.05%
        
        29,026
        
        10.46%Commercial
        37,182
        
        28.54%
        
        159,612
        
        27.29%Land
        52,492
        
        14.57%
        
        63,368
        
        8.21%Total real estate mortgage
        $   168,378
        
        100.00%
        
        $     538,549
        
        100.00%Unsecured
        286,039
        
        100.00%
        
        161,987
        
        100.00%Total unsecured
        $   286,039
        
        100.00%
        
        $     161,987
        
        100.00%Total allowance for loan losses
        $   454,417
        
        100.00%
        
        $     700,536
        
        100.00%   30       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  2.        Summary of Significant Accounting Policies (continued)  Allowance for loan losses (continued)  Activity in the allowance for loan losses is as follows:  Years Ended December 31,  2006
        
        
        
        2005
        
        
        
        2004Balance at beginning of year
        
        $
        700,536
        
        
        $
        745,476
        
        
        $
        680,469Charge-offsDomesticReal estate  mortgageSingle family (1-4 units)
        
        
        
        
        
        
        
        
        
        
        Apartments
        
        
        
        
        
        
        
        
        
        
        Commercial
        
        
        (6,707
        )
        
        
        (28,568
        )
        
        
        Land
        
        
        
        
        
        
        
        
        
        
        (6,707
        )
        
        
        (28,568
        )
        
        
        RecoveriesDomesticReal estate  mortgageSingle family (1-4 units)
        
        
        
        
        
        
        
        
        
        
        Apartments
        
        
        
        
        
        
        
        
        
        
        Commercial
        
        
        
        
        
        
        
        
        
        
        Land
        
        
        
        
        
        
        
        
        
        
        Net charge-offs
        
        
        (6,707
        )
        
        
        (28,568
        )
        
        
        Additions (recovery) charge to operations
        
        
        (49,102
        )
        
        
        (16,372
        )
        
        
        65,007Transfer to real estate held for sale reserve
        
        
        (190,310
        )
        
        
        
        
        
        
        Balance at end of year
        
        $
        454,417
        
        
        $
        700,536
        
        
        $
        745,476Ratio of net charge-offs duringthe period to average secured loansoutstanding during the period
        
        
        0.11
        %
        
        
        0.45
        %
        
        
        0.00
        %   31       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  2.        Summary of Significant Accounting Policies (continued)  Cash and cash equivalents  The Partnership considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Periodically, Partnership cash balances exceed federally insured limits.  Real estate held for sale  Real estate held for sale includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the propertys estimated fair value, less estimated costs to sell.  The Partnership periodically compares the carrying value of real estate to expected future undiscounted cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to fair value. During 2006, the Partnership transferred $190,310 from the allowance for loan losses to the allowance for losses on real estate held for sale.  Investment in limited liability company  Investment in limited liability company is accounted for using the equity method. In 2006, the Company had an 8% interest in the Larkin Street Property Company, LLC (see Note 6).  Income taxes  No provision for federal and state income taxes (other than an $800 state minimum tax) is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply.  Net income per $1,000 invested  Amounts reflected in the statements of income as net income per $1,000 invested by limited partners for the entire period are amounts allocated to limited partners who had their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive periodic distributions of their net income. Individual income is allocated each month based on the limited partners pro rata share of partners capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options.  32       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  2.        Summary of Significant Accounting Policies (continued)  Late fee revenue  Late fees are generally charged at 6% of the monthly installment payment past due. During 2006, 2005 and 2004, late fee revenue of $6,244, $10,903 and $19,822, respectively, was recorded. The Partnership has a late fee receivable at December 31, 2006 and 2005 of $1,597 and $891, respectively.  Recently issued accounting pronouncements  In March 2006, the FASB issued SFAS No. 156,, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140 (SFAS 156), which permits, but does not require, an entity to account for one or more classes of servicing rights (i.e., mortgage servicing rights) at fair value, with the changes in fair value recorded in the statement of income. SFAS 156 is effective in the first quarter of 2007. The adoption of SFAS 156 is not expected to have a material impact on the Partnerships financial condition and results of operations.  On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for the Partnerships financial statements issued for the year beginning on January 1, 2008, with earlier adoption permitted. Management is currently evaluating the impact and timing of the adoption of SFAS 157 on the Partnerships financial condition and results of operations. On February 15, 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159), which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further establishes certain additional disclosure requirements. SFAS 159 is effective for the Partnerships financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. Management is currently evaluating the impact and timing of the adoption of SFAS 159 on the Partnerships financial
condition and results of operations. On July 13, 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The Partnership will adopt FIN 48 in the first quarter of 2007. The adoption of FIN 48 is not expected to have a material impact on the Partnerships financial condition and results of operations. On September 13, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 expresses the SEC Staffs views regarding the process of quantifying financial statement misstatements. SAB 108 states that in evaluating the materiality of financial statement misstatements, an entity must quantify the impact of correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. SAB 108 is effective for the year ended December 31, 2006. The application of SAB 108 did not have an impact on the Partnerships financial condition and results of operations.  33


REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  3.        Other Partnership Provisions  The Partnership is a California Limited Partnership. The rights, duties and powers of the general and limited partners of the Partnership are governed by the limited partnership agreement and Sections 15611 et seq. of the California Corporations Code.  The general partners are in complete control of the Partnership business, subject to the voting rights of the limited partners on specified matters. Any one of the general partners acting alone has the power and authority to act for and bind the Partnership.  A majority of the outstanding limited partnership interests may, without the permission of the general partners, vote to: (i) terminate the Partnership, (ii) amend the limited partnership agreement, (iii) approve or disapprove the sale of all or substantially all of the assets of the Partnership and (iv) remove or replace one or all of the general partners.  The approval of the majority of limited partners is required to elect a new general partner to continue the Partnership business where there is no remaining general partner after a general partner ceases to be a general partner other than by removal.  Election to receive monthly, quarterly or annual distributions  At subscription, investors elected either to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound. Subject to certain limitations, a compounding investor may subsequently change his election, but an investors election to have cash distributions is irrevocable.  Profits and losses  Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners.  Liquidity, capital withdrawals and early withdrawals  There are substantial restrictions on transferability of Partnership units and accordingly an investment in the Partnership is not liquid. Limited partners have no right to withdraw from the Partnership or to obtain the return of their capital account for at least one year from the date of purchase of units.  In order to provide a certain degree of liquidity to the limited partners after the one-year period, limited partners may withdraw all or part of their capital accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn early and will be deducted from the capital account.  34       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  3.
        Other Partnership Provisions (continued)  Liquidity, capital withdrawals and early withdrawals (continued)  After five years from the date of purchase of the units, limited partners have the right to withdraw from the Partnership, on an installment basis. Generally this is done over a five-year period in twenty quarterly installments. Once a limited partner has been in the Partnership for the minimum five-year period, no penalty will be imposed if withdrawal is made in twenty quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the general partners may liquidate all or part of a limited partners capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given. This withdrawal is subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn without penalty.  The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnerships capacity to return a limited partners capital account is restricted to the availability of Partnership cash flow. Furthermore, no more than 20% of the total limited partners capital accounts outstanding at the beginning of any year, shall be liquidated during any calendar year.  4.        General Partners and Related Parties  The following are commissions and fees that are paid to the general partners and affiliates:  Mortgage brokerage commissions  For fees in connection with the review, selection, evaluation, negotiation and extension of loans, an affiliate of the general partners may collect an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers and thus, are not an expense of the Partnership. During 2006, 2005 and 2004, loan brokerage commissions paid by the borrowers to Redwood Mortgage Corp. were $97,358, $137,913 and $93,465, respectively.  Mortgage servicing fees  Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general partners, based on the unpaid principal balance of the loan portfolio, or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Once a loan is categorized as impaired, mortgage servicing fees are no longer accrued. Additional service fees are recorded upon the receipt of any subsequent payments on impaired loans. Mortgage servicing fees of $68,906 and $81,442 were incurred for 2005 and 2004, respectively. During 2006, Redwood Mortgage Corp. waived $56,647 of mortgage servicing fees. The Partnership has a payable to Redwood Mortgage Corp. for servicing fees of $71,998 at December 31, 2006 and 2005.  Asset management fee  The general partners receive monthly fees for managing the Partnerships loan portfolio and operations of up to 1/32 of 1% of the net asset value(3/8 of 1% annually). Asset management fees of $8,748, $34,512 and $34,073 were incurred for 2006, 2005 and 2004, respectively. During 2006, the general partners waived $26,208 of asset management fees.  35       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  4.
        General Partners and Related Parties (continued)  Other fees  The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners or affiliates.  Operating expenses  The Partnership receives certain operating and administrative services from Redwood Mortgage Corp.  Redwood Mortgage Corp may be reimbursed by the Partnership for operating expenses incurred on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, and postage and preparation of reports to limited partners.  During 2006, 2005 and 2004, operating expenses totaling $12,299, $13,663, and $17,826, respectively, were reimbursed to Redwood Mortgage Corp.  To the extent that some operating and administrative services were not reimbursed, the financial position and results of Partnership operation may be different.  5.        Real Estate Held for Sale  In December 2004, the Partnership acquired land through a deed in lieu of foreclosure. At this date, the Partnerships investment totaled $1,752,836 including accrued interest and advances. During 2006, management established a $190,310 reserve against this property to reduce the carrying amount to managements estimate of the ultimate net realizable value of the property. One parcel was sold during 2006 for $336,652. The partnership incurred a loss on this sale of $28,336 which was fully reserved for. At December 31, 2006, the partnerships total investment in this property was $1,470,655, less a remaining reserve of $161,974.  During 2004, the Partnership sold real estate with an original investment of $1,200,518, and a carrying value of $586,713, for $586,713. The original investment in this property had been reduced in prior years to managements estimate of the ultimate realizable value of the property.  During 1993, the Partnership acquired land through foreclosure. Management believes the full amount of the Partnerships investment, $62,720 at December 31, 2006, will be recovered based on its current estimate of the propertys fair value.  The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, including estimated costs to sell as of December 31, 2006 and 2005:  2006
        
        
        
        2005Costs of properties
        
        $
        1,533,375
        
        
        $
        1,870,027Reduction in value
        
        
        (161,974
        )
        
        
        Real estate held for sale, net
        
        $
        1,371,401
        
        
        $
        1,870,027   36       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  6.        Investment in Limited Liability Company  As a result of acquiring real properties through foreclosure, the Partnership transferred its interests (principally land and building) to a limited liability company, Larkin Street Property Company, LLC (Larkin).  Larkin was created during 2005. It is owned 8% by the Partnership and 92% by affiliates. The property is under development and development costs were capitalized. No income or expense was recognized by Larkin during 2006 and 2005.  7.        Bank Line of Credit  The Partnership has a bank line of credit secured by its loan portfolio of up to $2,500,000 at .25% over prime. There were no balances outstanding on this line as of December 31, 2006 and 2005, and the interest rate was 8.5% at December 31, 2006 and 7.50% at December 31, 2005. This line of credit expires December 2, 2011 and requires the Partnership to meet certain financial covenants. As of December 31, 2006 and 2005, the Partnership was in compliance with all loan covenants.  8.        Income Taxes  The following reflects a reconciliation of partners capital reflected in the financial statements to the tax basis of the Partnership capital:  2006
        
        
        
        2005Partners capital per financial statements
        
        $
        9,325,994
        
        
        $
        9,282,216Allowance for loan losses
        
        
        454,417
        
        
        
        700,536Allowance for real estate losses
        
        
        161,974
        
        
        
        Partners capital tax basis
        
        $
        9,942,385
        
        
        $
        9,982,752  In 2006 and 2005, approximately 67% and 68%, respectively, of taxable income was allocated to tax-exempt organizations (i.e., retirement plans).  37       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  9.        Fair Value of Financial Instruments  The following methods and assumptions were used to estimate the fair value of financial instruments:  (a)
        Cash and cash equivalents - The carrying amount equals fair value. All amounts, including interest bearing, are subject to immediate withdrawal.  (b)
        Secured loans had a carrying value of $6,218,439 and $5,448,401 at December 31, 2006 and 2005, respectively. The fair value of these loans of $6,203,160 and $5,566,133, respectively, was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. The applicable amount of the allowance for loan losses along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value.  (c)
        Unsecured loans carrying value was $714,659 and $161,987 at December 31, 2006 and 2005, respectively.  The fair value of these loans approximates their carrying value after consideration of the allowance for loan losses established by the general partners on these loans.  10.      Non-cash Transactions  During 2006, a previously secured loan became unsecured which resulted in a decrease to secured loans, advances and accrued interest of  $531,559, $2,385 and $34,745, respectively, and an increase to unsecured loans of $568,689.  During 2006, a previous real estate owned property was sold with the Partnership providing financing. This resulted in a decrease to real estate owned and allowance for real estate held for sale of $256,873 and $28,336, respectively and an increase to secured loans of $228,536.  During 2005, the Partnership foreclosed on property (see Note 6), which resulted in an increase in investment in limited liability company of $831,178 and a decrease in secured loans, accrued interest and advances of $776,228, $49,422 and $5,528, respectively. In addition, an unsecured loan was written-off against the allowance for loan losses in the amount of $28,568.  During 2004, the Partnership foreclosed on property (see Note 5), which resulted in an increase in real estate held for sale of $1,752,836 and a decrease in loans receivable, accrued interest and advances of $1,196,509, $552,044 and $4,283, respectively.  38       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  11.      Loan Concentrations and Characteristics  Most loans are secured by recorded deeds of trust. At December 31, 2006 and 2005, there were 22 and 23 secured loans outstanding, respectively, with the following characteristics:  2006
        
        
        
        
        2005Number of secured loans outstanding
        
        
        22
        
        
        
        
        23Total secured loans outstanding
        
        $
        6,218,439
        
        
        
        $
        5,448,401Average secured loan outstanding
        
        $
        282,656
        
        
        
        $
        236,887Average secured loan as percent of total secured loans
        
        
        4.55
        %
        
        
        
        4.35
        %Average secured loan as percent of partners capital
        
        
        3.03
        %
        
        
        
        2.55
        %Largest secured loan outstanding
        
        $
        550,000
        
        
        
        $
        634,479Largest secured loan as percent of total secured loans
        
        
        8.84
        %
        
        
        
        11.65
        %Largest secured loan as percent of partners capital
        
        
        5.90
        %
        
        
        
        6.84
        %Largest secured loan as percent of total assets
        
        
        5.85
        %
        
        
        
        6.78
        %Number of counties where security is located (all California)
        
        
        14
        
        
        
        
        13Largest percentage of loans in one county
        
        
        25.53
        %
        
        
        
        22.37
        %Average secured loan to appraised value of security based onappraised values and prior liens at time loan was consummated
        
        
        61.62
        %
        
        
        
        67.18
        %Number of secured loans in foreclosure
        
        
        
        
        
        
        
        Amount of secured loans in foreclosure
        
        
        
        
        
        
        
            39       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  11.      Loan Concentrations and Characteristics (continued)  The following categories of secured loans were held at December 31, 2006 and 2005:  2006
        
        
        
        2005First trust deeds
        
        $
        5,011,682
        
        
        $
        3,920,466Second trust deeds
        
        
        1,206,757
        
        
        
        1,453,054Third trust deeds
        
        
        
        
        
        
        74,881Total loans
        
        
        6,218,439
        
        
        
        5,448,401Prior liens due other lenders at time of loan
        
        
        2,560,514
        
        
        
        4,272,101Total debt
        
        $
        8,778,953
        
        
        $
        9,720,502Appraised property value at time of loan
        
        $
        14,247,048
        
        
        $
        14,470,371Total debt as percent of appraisals
        
        
        61.62
        %
        
        
        67.18
        %Loans by type of propertySingle family (1-4 units)
        
        $
        2,850,592
        
        
        $
        2,944,330Apartments
        
        
        687,500
        
        
        
        570,000Commercial
        
        
        1,774,528
        
        
        
        1,487,019Land
        
        
        905,819
        
        
        
        447,052$
        6,218,439
        
        
        $
        5,448,401  The interest rates on these loans ranged from 7.00% to 11.00% at December 31, 2006 and 8.50% to 10.00% at December 31, 2005.  Scheduled maturity dates of secured loans as of December 31, 2006 are as follows:  Year Ending December 31,2007
        
        $
        2,225,0002008
        
        
        1,127,2832009
        
        
        1,462,7372010
        
        
        514,0282011
        
        
        601,391thereafter
        
        
        288,000Total
        
        $
        6,218,439    40       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  11.      Loan Concentrations and Characteristics (continued)  The scheduled maturities for 2007 above include $250,000 in one loan which was 90 days past maturity at December 31, 2006. This loan did not have interest payments categorized as delinquent over 90 days. Occasionally, the Partnership allows borrowers to continue to make the payments on loans past maturity for periods of time. It is the Partnerships experience that loans are sometimes refinanced or repaid before the maturity date. Therefore, the above tabulation for scheduled maturities is not a forecast of future cash receipts.  During 2005, the Partnership had a substantial amount of its loan receivable balance due on two loans from one borrower, which were then paid in full. This borrower accounted for approximately 17% of interest on loans for the year ended December 31, 2005.  The Partnership also had 22% of its receivable balance due from two borrowers at December 31, 2005. Loans to the two borrowers in 2005 were funded late in the year, hence income derived from these investments accounted for 3.10% of the interest revenue for the year ended December, 31 2005. Interest revenue for an additional two borrowers accounted for approximately 19% of interest revenue for the year ended December 31, 2004.  12.      Commitments and Contingencies  Workout agreements  The Partnership periodically negotiates various contractual workout agreements with borrowers whose loans are past maturity or who are delinquent in making payments. The Partnership is not obligated to fund additional money as of December 31, 2006. As of December 31, 2006 there are no loans under workout agreement.  Construction / rehabilitation loans  The Partnership makes construction and rehabilitation loans which are not fully disbursed at loan inception. The Partnership has approved the borrowers up to a maximum loan balance; however, disbursements are made periodically during completion phases of the construction or rehabilitation or at such other times as required under the loan documents. At December 31, 2006, there were no undisbursed loan funds. The Partnership does not maintain a separate cash reserve to hold the undisbursed obligations, which are intended to be funded.  Legal proceedings  The Partnership is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership.  41       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2006, 2005 and 2004  13. Selected Financial Information (Unaudited)  Calendar Quarter  First
        
        Second
        
        Third
        
        Fourth
        
        AnnualRevenues2006
        $   137,842
        
        $   149,504
        
        $  151,278
        
        $   142,660
        
        $   581,2842005
        $   174,489
        
        $   152,219
        
        $  204,591
        
        $   160,086
        
        $   691,385Expenses2006
        $     11,716
        
        $     23,377
        
        $    24,814
        
        $     15,993
        
        $     75,9002005
        $     35,393
        
        $     16,871
        
        $    56,016
        
        $     45,550
        
        $   153,830Net income allocatedto general partners2006
        $       1,261
        
        $       1,261
        
        $      1,264
        
        $       1,268
        
        $       5,0542005
        $       1,391
        
        $       1,353
        
        $      1,486
        
        $       1,146
        
        $       5,376Net income allocatedto limited partners2006
        $   124,865
        
        $   124,866
        
        $  125,200
        
        $   125,400
        
        $   500,3302005
        $   137,705
        
        $   133,995
        
        $  147,089
        
        $   113,390
        
        $   532,179Net income per $1,000invested where income isReinvested2006
        $            13
        
        $            13
        
        $           13
        
        $            16
        
        $            552005
        $            15
        
        $            15
        
        $           16
        
        $            13
        
        $            59Withdrawn2006
        $            13
        
        $            13
        
        $           13
        
        $            15
        
        $            542005
        $            15
        
        $            15
        
        $           16
        
        $            12
        
        $            58   42       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2006, 2005 and 2004   Col B.
        
        Col. C - Additions
        
        
        
        Col E.Balance at
        
        Charged to
        
        Charged
        
        
        
        BalanceCol A.
        
        Beginning
        
        Costs and
        
        to Other
        
        Col. D
        
        at EndDescription
        
        of Period
        
        Expenses
        
        Accounts
        
        Deductions
        
        of PeriodYear Ended December 31, 2004Deducted from asset accountsAllowance for loan losses
        
        $   680,469
        
        $          65,007
        
        $                -
        
        $             -
        
        $  745,476Cumulative write-down ofreal estate held for sale (REO)
        
        630,169
        
        -
        
        -
        
        (596,796)
        (b)
        33,373$1,310,638
        
        $          65,007
        
        $                -
        
        $(596,796)
        
        $   778,849Year Ended December 31, 2005Deducted from asset accountsAllowance for loan losses
        
        $   745,476
        
        $       (16,372)
        
        $                -
        
        $(28,568)
        (a)
        $  700,536Cumulative write-down ofreal estate held for sale (REO)
        
        33,373
        
        (33,373)
        
        -
        
        -
        
        -$   778,849
        
        $       (49,745)
        
        $                -
        
        $(28,568)
        
        $  700,536Year Ended December 31, 2006Deducted from asset accountsAllowance for loan losses
        
        $   700,536
        
        $       (49,102)
        
        $                -
        
        $(197,017)
        (b)
        $  454,417Cumulative write-down ofreal estate held for sale (REO)
        
        -
        
        -
        
        -
        
        161,974
        (b)
        161,974$   700,536
        
        $       (49,102)
        
        $                -
        
        $ (35,043)
        
        $   616,391(a) - Represents write-offs on loans.(b) - Represents sales of REO.    43        REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Schedule IV Mortgage Loans on Real Estate Rule 12-29 Loans on Real Estate December 31, 2006   Col. HPrincipalCol. F
        
        AmountFace
        Col. G
        of LoansCol. C
        Col. D
        
        Amount of
        Carrying
        Subject to
        Col. I
        Col. JCol. B
        Final
        Periodic
        Col. E
        Mortgage
        Amount of
        Delinquent
        Type
        CaliforniaCol. A
        Interest
        Maturity
        Payment
        Prior
        Original
        Mortgage
        Principal
        of
        GeographicDescription
        Rate
        Date
        Terms
        Liens
        Amount
        Investment
        or Interest
        Lien
        LocationRes.
        9.00%
        04/01/09
        $     1,139
        $              -
        $   141,500
        $   136,336
        $                -
        1st
        San JoaquinComm.
        9.00%
        08/01/09
        3,000
        -
        400,000
        400,000
        -
        1st
        San FranciscoRes.
        8.50%
        09/01/06
        1,171
        -
        200,000
        250,000
        250,000
        1st
        MontereyRes.
        9.25%
        11/01/09
        1,234
        352,177
        150,000
        147,865
        -
        2nd
        San MateoComm.
        9.50%
        03/01/10
        3,279
        -
        390,000
        385,636
        -
        1st
        San MateoRes.
        9.00%
        03/01/10
        1,046
        -
        130,000
        128,391
        -
        1st
        Santa CruzLand
        9.50%
        10/01/07
        3,988
        -
        487,500
        487,500
        487,500
        1st
        Santa ClaraRes.
        8.50%
        01/01/08
        1,523
        200,398
        215,000
        215,000
        -
        2nd
        SolanoLand
        11.00%
        2/01/08
        1,742
        -
        190,000
        189,783
        -
        1st
        CalaverasRes.
        9.50%
        3/01/07
        3,958
        -
        500,000
        500,000
        -
        1st
        Santa ClaraComm.
        9.88%
        4/01/08
        3,292
        -
        400,000
        400,000
        -
        1st
        AlamedaRes.
        8.50%
        6/01/09
        3,896
        -
        550,000
        550,000
        -
        1st
        NapaRes.
        8.88%
        7/01/11
        3,698
        1,083,333
        500,000
        500,000
        -
        2nd
        San FranciscoApts.
        9.25%
        12/01/07
        1,869
        424,606
        242,500
        242,500
        -
        2nd
        San FranciscoComm.
        10.00%
        07/01/08
        1,563
        -
        187,500
        187,500
        -
        1st
        AlamedaComm.
        10.25%
        09/01/07
        2,563
        -
        300,000
        300,000
        -
        1st
        Santa ClaraLand
        7.00%
        10/01/09
        1,333
        -
        228,536
        228,536
        -
        1st
        StanislausComm.
        10.25%
        4/01/11
        940
        500,000
        101,500
        101,392
        -
        2nd
        Contra CostaRes.
        9.25%
        11/01/08
        1,041
        -
        135,000
        135,000
        -
        1st
        RiversideRes.
        10.00%
        01/01/12
        1,275
        -
        153,000
        153,000
        -
        1st
        Contra CostaRes.
        9.25%
        1/1/12
        1,111
        -
        135,000
        135,000
        -
        1st
        San BernardinoApts.
        9.25%
        12/1/07
        3,430
        -
        445,000
        445,000
        -
        1st
        San FranciscoTotal
        
        
        
        $2,560,514
        $6,182,036
        $6,218,439
        $737,500   Note:  Most loans have balloon payments due at maturity.   44


REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Schedule IV (continued) Mortgage Loans on Real Estate Rule 12-29 Loans on Real Estate, continued   Reconciliation of carrying amount (cost) of loans at close of periods  Year ended December 31,  2006
        
        
        
        
        2005
        
        
        
        
        2004Balance at beginning of year
        
        $
        5,448,401
        
        
        
        $
        7,388,478
        
        
        
        $
        8,280,826Additions during periodNew loans
        
        
        4,459,946
        
        
        
        
        3,859,637
        
        
        
        
        3,821,719Other
        
        
        228,536
        
        
        
        
        
        
        
        
        
        Total additions
        
        
        4,688,482
        
        
        
        
        3,859,637
        
        
        
        
        3,821,719Deductions during periodCollections of principal
        
        
        3,380,178
        
        
        
        
        5,023,486
        
        
        
        
        3,517,558Foreclosures
        
        
        
        
        
        
        
        776,228
        
        
        
        
        1,196,509Cost of loans sold
        
        
        
        
        
        
        
        
        
        
        
        
        Amortization of premium
        
        
        
        
        
        
        
        
        
        
        
        
        Other
        
        
        538,266
        
        
        
        
        
        
        
        
        
        Total deductions
        
        
        3,918,444
        
        
        
        
        5,799,714
        
        
        
        
        4,714,067Balance at close of year
        
        $
        6,218,439
        
        
        
        $
        5,448,401
        
        
        
        $
        7,388,478     45       Item 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  There were no disagreements with the Partnerships independent registered public accounting firm during the years ended December 31, 2006 and 2005.  Item 9a.  Controls and Procedures  The Partnership carried out an evaluation, under the supervision and with the participation of the general partners of the effectiveness of the design and operation of the Partnerships disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, the general partners concluded that the Partnerships disclosure controls and procedures were effective in timely alerting the general partners to material information related to the Partnership that is required to be included in our periodic filings with the Securities and Exchange Commission.  There were no significant changes in the Partnerships internal control over financial reporting during the Partnerships fourth fiscal quarter that have materially affected, or are likely to materially affect, the Partnerships internal control over financial reporting.  Item 9b.  Other Information  None  46       Part III  Item 10  Directors,  Executive Officers  and Corporate Governance  The Partnership has no Officers or Directors. Rather, the activities of the Partnership are managed by the two general partners, one of whom is an individual, Michael R. Burwell. The second general partner is Gymno Corporation, a California corporation, formed in 1986. Mr. Burwell is one of three shareholders of Gymno Corporation, a California corporation, and has a 50% interest in the corporation.  The remaining two shareholders are trusts as to which Mr. Burwell is the trustee of each trust.  The General Partners.  Michael R. Burwell.Michael R. Burwell, age 50, General Partner, past member of Board of Trustees and Treasurer, Mortgage Brokers Institute (1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage Corp. (1979-present); Director, Secretary and Treasurer A & B Financial Services, Inc. (1980-present); President, Director, Chief Financial Officer and Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as a real estate sales person.  Gymno Corporation.Gymno Corporation, General Partner, is a California corporation formed in 1986 for the purpose of acting as a general partner of this Partnership and of other limited partnerships formed by the individual general partners. The shares in Gymno Corporation are held equally by Michael R. Burwell and the two trusts, each of which Michael R. Burwell is the trustee. Michael R. Burwell is a director of Gymno and the director position held by D. Russell Burwell is currently vacant. Michael R. Burwell is its President, Chief Financial Officer, and Secretary. Michael R. Burwell has a controlling interest in this company through his ownership of stock and as trustee of the Burwell trusts.  Financial Oversight by General Partners.  The Partnership does not have a board of directors or an audit committee. Accordingly, the general partners serve the equivalent function of an audit committee for, among other things, the following purposes:  appointment, compensation, review and oversight of the work of our independent public accountants, and establishing the enforcing of the Code of Ethics. However, since the Partnership does not have an audit committee and the general partners are not independent of the Partnership, the Partnership does not have an audit committee financial expert.  Code of Ethics.  The general partners have adopted a Code of Ethics applicable to the general partners and to any agents, employees or independent contractors engaged by the general partners to perform the functions of a principal financial officer, principal accounting officer or controller of the Partnership, if any. You may obtain a copy of this Code of Ethics, without charge, upon request by calling our Investor Services Department at (650) 365-5341.  47       Item 11  Executive Compensation  COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP  As indicated above in Item 10, the Partnership has no Officers or Directors. The Partnership is managed by the general partners. There are certain fees and other items paid to management and related parties.  A more complete description of management compensation is found in the Prospectus, pages 12-13, under the section Compensation of the General Partners and the Affiliates, which is incorporated by reference. Such compensation is summarized below.  The following compensation has been paid to the general partners and affiliates for services rendered during the year ended December 31, 2006. All such compensation is in compliance with the guidelines and limitations set forth in the partnership agreement.  Entity Receiving Compensation
        Description of Compensation and Services Rendered
        AmountI. Redwood Mortgage Corp.
        Mortgage Servicing Fee for servicing loans
        $0General Partners &/or Affiliates
        Asset Management Fee for managing assets
        $8,748General Partners
        1% interest in profits
        $5,054   II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) DURING THE YEAR ENDED DECEMBER 31, 2006  Redwood Mortgage Corp.
        Mortgage Brokerage Commissions for services in connectionwith the review, selection, evaluation, negotiation, and extensionof the loans paid by the borrowers and not by the Partnership
        $97,358Redwood Mortgage Corp.
        Processing and Escrow Fees for services in connection with feesnotary, document preparation, credit investigation, and escrowpayable by the borrowers and not by the Partnership
        $6,104Gymno Corporation
        Reconveyance Fee
        $492   III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE STATEMENT OF INCOME DURING THE YEAR ENDED DECEMBER 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,299  48       Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  The general partners are to own an aggregate total of 1% of the Partnership including a 1% portion of income and losses.  Item 13  Certain Relationships and Related Transactions, and Director Independence  Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II item 8, which describes related party fees and data.  Also refer to the Prospectus dated October 20, 1989 (incorporated herein by reference) on page 12 Compensation of General Partners and Affiliates and page 14 Conflicts of Interest.  Since the Partnership does not have a board of directors and since the general partners are not considered independent of the Partnership, the Partnership does not have the equivalent of independent directors.  Item 14  Principal Accountant Fees and Services  Fees for services performed for the Partnership by the principal accountant for 2006 and 2005 are as follows:  Audit FeesThe aggregate fees billed during the years ended December 31, 2006 and 2005 for professional services rendered for the audit of the Partnerships annual financial statements included in the Partnerships Annual Report on Form 10-K and review of financial statements included in the Partnerships Quarterly Reports on Form 10-Q were $55,635 and $44,675, respectively.  Audit Related FeesThere were no fees billed during the years ended December 31, 2006 and 2005 for audit-related services.  Tax feesThe aggregate fees billed for tax services for the years ended December 31, 2006 and 2005, were $4,275 and $4,063, respectively. These fees relate to professional services rendered primarily for tax compliance.  All Other FeesThere were no other fees billed during the years ended December 31, 2006 and 2005.  All audit and non-audit services are approved by the general partner prior to the accountant being engaged by the Partnership.  49       Part IV  Item 15  Exhibits, Financial Statements and Schedules  A.
        Documents filed as part of this report are incorporated:  1. In Part II, Item 8 under A - Financial Statements.  2. The Financial Statement Schedules are listed in Part II - Item 8 under B - Financial Statement Schedules.  3. Exhibits.  Exhibit No.
        
        Description of Exhibits  3.1
        
        Limited Partnership Agreement3.2
        
        Form of Certificate of Limited Partnership Interest3.3
        
        Certificate of Limited Partnership10.1
        
        Escrow Agreement10.2
        
        Servicing Agreement10.3
        (a)
        Form of Note secured by Deed of Trust which provides for principal and interest payments.(b)
        Form of Note secured by Deed of Trust which provides principal and interest payments and right of assumption(c)
        Form of Note secured by Deed of Trust which provides for interest only payments(d)
        Form of Note10.4
        (a)
        Deed of Trust and Assignment of Rents to accompany Exhibits   10.3  (a), and (c)(b)
        Deed of Trust and Assignment of Rents to accompany Exhibit 10.3 (b)(c)
        Deed of Trust to accompany Exhibit 10.3 (d)10.5
        
        Promissory Note for Formation Loan10.6
        
        Agreement to Seek a Lender31.1
        
        Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
        
        Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
        
        Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
        
        Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  All of the above exhibits, other than 31.1, 31.2, 32.1 and 32.2, were previously filed as the exhibits to Registrants Statement on Form S-11 (Registration No. 33-30427 and incorporated by reference herein).   B.
        See A (3) above.  C.
        See A (2) above. Additional reference is made to the prospectus (S-11 filed as part of the Registration statement) dated October 20, 1989 to pages 65 through 67 and Supplement #5 dated February 14, 1992 for financial data related to Gymno Corporation, a general partner.   50       SIGNATURES  Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 30th day of March 2007.  REDWOOD MORTGAGE INVESTORS VII  By:
        /S/ Michael R. BurwellMichael R. Burwell, General PartnerBy:
        Gymno Corporation, General PartnerBy:
        /S/ Michael R. BurwellMichael R. Burwell, President, Secretary
& Chief Financial Officer   Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity indicated on the 30th day of March 2007.  Signature
        Title
        Date   /S/ Michael R. BurwellMichael R. Burwell
        
        General Partner
        
        March 30, 2007   /S/ Michael R. BurwellMichael R. Burwell
        
        President, Secretary & Chief Financial Officer of Gymno Corporation (Principal Financial and Accounting Officer);
Director of Gymno Corporation
        
        March 30, 2007   51       Exhibit 31.1  GENERAL PARTNER CERTIFICATION  I, Michael R. Burwell, General Partner, certify that:  1.
        I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VII, a California Limited Partnership (the Registrant);  2.
        Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;  3.
        Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;  4.
        The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:  (a)
        designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;  (b)
        evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (c)
        disclosed in this report any change in the Registrants control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and  5.
        The Registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions):  (a)
        all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and  (b)
        any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting.   /s/ Michael R. Burwell ____________________________ Michael R. Burwell, General Partner March 30, 2007  52       Exhibit 31.2  PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION  I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner, certify that:  1.     I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VII, a California Limited Partnership (the Registrant);  2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;  3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;  4.      The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:  (a)
        designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;  (b)
        evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (c)
        disclosed in this report any change in the Registrants control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and  5.         The Registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions):  (a)
        all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and  (b)
        any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting.   /s/ Michael R. Burwell ___________________________ Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 30, 2007  53       Exhibit 32.1  CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Annual Report of Redwood Mortgage Investors VII (the Partnership) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the Partnership, certify that to the best of my knowledge:  (1)
        The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  (2)
        The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated.  This Certification has not been, and shall not be deemed, filed with the Securities and Exchange Commission.    /s/ Michael R. Burwell _____________________________ Michael R. Burwell, General Partner March 30, 2007   54        Exhibit 32.2  CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Annual Report of Redwood Mortgage Investors VII (the Partnership) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that to the best of my knowledge:  (1)
        The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  (2)
        The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated.  This Certification has not been, and shall not be deemed, filed with the Securities and Exchange Commission.    /s/ Michael R. Burwell _____________________________ Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 30, 2007   55